2015 Air Cargo Roundtable: Reversal of fortune may be for real

Having been in the doldrums for the past several years, the air cargo sector may be staging a modest comeback. Resurgent consumer confidence is driving up demand in the U.S. while fuel prices have never been lower, helping carriers to reduce once skyrocketing operating expenses.

Reports indicate that airlines are keeping their freighters, but are also pinning hopes on efficiency improvements by using newer and more nimble aircraft in an overdue effort to further chip away at expenses. And according to the International Air Transport Association (IATA), underlying trends for North American volumes are, overall, rather positive.

Trade is growing, and the month-to-month comparison of volume year-to-date indicates that capacity fell 2.8 percent—continuing the recent trend of improving load factors. And because the new air cargo environment has become increasingly complex these days, shippers who find it harder to book payloads on freighters are often opting for passenger aircraft with excess belly space, further maxing out loads and improving the bottom line for carriers.

To help put this reversal of fortune into better perspective, Logistics Management met last month with a roundtable of industry experts to share their views on how shippers can work with carriers to mitigate risk and optimize their supply chains.

Joining us in our 2015 Air Cargo Roundtable we have Brandon Fried, executive director, Air Forwarders Association; Thomas Cook, CEO of the consultancy Apex Global Supply Chain Management; and David Ross, transportation and logistics director at investment firm Stifel Nicolaus.

Logistics Management (LM): Can shippers expect to get a break on rates if fuel prices remain low?
Brandon Fried: If prices hold at or around today’s levels, the answer is probably. Given that fuel is a proportionally higher cost element in air than other modes, it could help stem some mode shift as well. Many carriers are trapped in high fuel hedging contracts, so this could also delay the passing of savings to shippers. Only time will tell.
Tom Cook: I agree with Brandon. We may not see this happen in the short-term, but the long-term implications are significant.
David Ross: And because fuel is such a major cost component of airlift, lower prices should translate into lower shipping rates.

LM: Have shippers migrated from ocean to air as a consequence of port congestion?
Cook: Beyond a doubt. Our air volume is up over 50 percent as a result of the past labor disruptions at West Coast seaports. Furthermore, there’s little evidence that the congestion problems have been resolved.
Fried: Indeed, we’ve seen most of this shift in the eastbound trade from Asia to the U.S. Contract issues aside, there appear to be significant systemic issues at U.S. West Coast ports that will not be going away simply because new labor contracts have been signed. Shippers want confidence in the dependability of their supply chains, and the West Coast slowdown during last year’s peak season created an element of uncertainty that may linger for a while.

LM: Do you believe we’ll see a permanent shift back to air as a consequence of port congestion?
Ross: No, we don’t believe this represents a permanent modal shift back to air. As we saw in 2002 with the last West Coast worker stoppage, more shippers looked to East Coast ports as an option for getting goods to market without risking significant delays. We do believe, however, that there will be a decent amount of this freight that will not return to the West Coast.
Cook: David makes a valid point. In the long run, shippers will always default to the lower cost mode, but they most certainly will be considering other contingencies. And air cargo is among those to be considered when mitigating risk.

LM: Another risk concern may be related to new regulatory obstacles and security initiatives this year. What do shippers have to know about what’s coming up?
Cook: Shippers and forwarders have to remain vigilant when it comes to the Foreign Corrupt Practices Act—the Department of Justice certainly is. They continue to investigate and prosecute price-fixing schemes and cargo fuel charges against carriers, and that has implications for us all. Shippers must also remain aware of the U.S. Department of Commerce’s Bureau of Industry and Security (BIS) licensing, especially when it comes to doing business with Cuba and other sanctioned countries. Finally, shippers have to be careful of any exports that might fall under the jurisdiction of the International Traffic in Arms Regulations.
Fried: Tom has outlined the things that should be keeping shippers up at night, but the more mundane concerns matter as well. For example, Air Cargo Advance Screening Strategic Plans implemented by the U.S. Customs and Border Protection Department should be considered when choosing a capable freight intermediary. They can also save shipper’s money by having an advanced electronic export manifest process. These initiatives have the potential to drive up cost and affect cycle time if not addressed in a timely fashion.

LM: Time is of the essence with many goods carried by air carriers. Are you seeing any shift in commodities these days?
Fried: Not really. The basic air value proposition continues to be important for high-value finished products, electronic components necessary to keep assembly operations humming, perishables of all types, and of course pharmaceuticals and biomeds.
Cook: Indeed, we’re seeing more perishables, food, and consumer products—particularly during peak season—driving up demand for air cargo space.
Ross: I’ll add that we’re seeing retail apparel and auto parts rounding out those staple categories, especially now that lower fuel prices are making room for a commodity mix.

LM: We’re hearing a lot about advances in controlled temperature technologies these days. What advances in the “cold chain” are being made in air?
Fried: We’ve seen an increase in airline infrastructure investment to handle cold chain shipments. There have also been significant advances in temperature monitoring technology and unit load device design focusing on the perishable product.
Ross: And certainly 3PLs are focused more than ever on establishing networks for this service, as healthcare is viewed as a long-term growth area in airfreight.
Cook: Meanwhile, shippers are doing a better job of measuring their carrier’s performance when it comes to tracking and tracing temperature control. It’s become a real differentiator, particularly when serving foreign markets.

LM: Which raises the question: Which geographical region is growing the fastest for air cargo?
Cook: Inbound cargo from Asia and outbound to Latin America represent the best segments for us now.
Fried: Africa and the Mid-East appear to be strong. The economic challenges in Europe are currently a bit of a drag, while Asia continues to show signs of resurgence. According to our most recent survey of members, they expect to see modest growth in most international markets through the first have of the year.
Ross: Just to make note, we’re also paying attention to the lanes connecting Asia to emerging markets on all continents. 

LM: Amid all of this potential, are we seeing carriers doing a better job managing capacity?
Ross: The issue here is that freighter carriers don’t manage global cargo capacity. Freighters are only about half of the total, and the passenger airlines manage capacity around people, not freight.
Fried: In fact, our primary source of lift continues to be passenger aircraft. But for the most part, space has not been an issue. The notable exception has, of course, been the U.S. to Asia trade where port issues have caused demand for air to spike.
Cook: The bottom line is that both kinds of carriers still work to control costs and not chase opportunity—and that’s not how good partnerships are formed between carriers.

LM: And that speaks to our final question. How have carrier partnerships and mergers worked out? Do you expect to see any more?
Fried: For the most part, yes. Sure, there have been isolated glitches, but nothing of a crippling nature. We hope that the recent mergers rescued troubled airlines and now allow the new entities to succeed as a dependable source of future lift for forwarders. In the U.S., we’ve probably seen our share of mergers for now, but others around the world are sure to occur.
Cook: But even better would be those partnerships that form a strong, strategic relationship with co-loading and more efficient service. As I’ve stated many times in my books, air carriers should be expected to help shippers drive risk and spend out of the supply chain. It’s as simple as that.